The Future Of Audit

James P. Liddy is KPMG LLP U.S. Vice Chair, Audit and Regional Head of Audit, Americas.

Every year, spring signals the end of another audit season for many companies and their auditors. It’s a cycle that has remained essentially unchanged for more than 80 years since the advent of the classic audit.

While this relative stability continues to stand as a pillar of confidence for investors and the capital markets, it is becoming increasingly clear that audits can and must do more.

Advances in technology and the massive proliferation of available information have created a new landscape for financial reporting. With investors now having access to a seemingly unlimited breadth and depth of information, the need has never been greater for the audit process to evolve by providing deeper and more relevant insights about an organization’s financial condition and performance –while maintaining and continually improving audit quality.

Does this mean that core elements of the audit such as the current “pass/fail opinion” that external auditors are mandated to provide – and that has served investors well for years, need to expand? Absolutely.

While robust dialogue between public company boards, regulators, investors and the capital markets to appropriately set expectations and manage concerns is already well underway, there is no question that the promise of a new normal for auditing is real and will result in substantial benefits.

For instance, consider the potential for more effective audits done by auditors with more dynamic tools and skill sets. Today, in many cases we perform procedures over a relatively small sample of transactions – as few as 30 or 40 – and extrapolate conclusions across a much broader set of data. In the future, using high powered analytics, auditors will have the capacity to examine 100 percent of a client’s transactions. We will be able to sort, filter and analyze tens of thousands or millions of transactions to identify anomalies, making it easier to focus in on areas of potential concern and drill down on those items that may have the highest risks.

This will enable us more than ever before to help assess risks and identify trends through the audit process. With smart data, each year’s audit will also “learn” from prior years, exposing areas of possible risk and building a self-enriching knowledge base to better inform companies and their investors.

Over time, external auditors will be able to benchmark the companies they audit against broad sets of data from across an industry or geography, giving us better information about potential risks and providing leaders of large organizations with valuable perspectives and insights they can use in their business. When combining all aspects of a data-driven audit, it will allow auditors to spend more of their time on the estimates, judgments and unique transactions that require more rigor and attention. This will provide greater value for companies and the capital markets, while building confidence and more exciting careers for auditors.

Future audits will also use advanced data and analytics capabilities to look beyond an organization’s walls and understand the impact of broader forces in ways we never could before.

For example, how do weather, traffic patterns, economic conditions, unemployment in select demographics, or other business elements affect the financial performance of a retail operation? Advances in data science allow us to integrate “unstructured” data from a wide variety of sources – from weather reports to unemployment filings to commodity prices – to gauge potential impacts on a company’s performance and its risk profile. And the ability to mine this data and incorporate it into the audit will provide for enhanced audit quality.

Change will not come without challenges. Addressing concerns over auditor independence, data security, transparency and more will require an intense dialogue between companies and their auditors about how much data to share, and how information should be housed and protected. It will also require extensive engagement with regulators, to demonstrate how this data and analytics revolution will first and foremost strengthen audit quality. We must ensure that this is a journey of shared goals and mutual benefits for investors, regulators, and companies themselves.

For external auditors, this future will also require deeper training in areas outside their historic skill sets. While the practice of audit already draws on other disciplines like risk management, supply chain, forensic and IT, the auditor of tomorrow will need to increase their understanding of these non-traditional disciplines and work more closely than ever before with data and analytics specialists.

It is clear that auditors must embrace this evolved approach to understanding an organization’s most critical information to ensure that all stakeholders in the capital market system continue to be well served by the audit profession. We must collectively strive to ensure that the audit remains an unambiguous pillar of confidence, and at the same time, provides greater value, relevance and utility around financial reporting analysis than has been seen before.

James P. Liddy is KPMG LLP U.S. Vice Chair, Audit and Regional Head of Audit, Americas.

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